UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
F O R M 10-K
☒ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended May 31, 2022
or
☐
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission file number 0-3498
TAYLOR DEVICES INC
(Exact name of registrant as specified in its charter)
90 Taylor Drive, North Tonawanda, NY 14120
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (716) 694-0800
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Trading Symbol Name of each exchange on which registered
None None None
Securities registered pursuant to Section 12(g) of
the Act:
Common Stock ($.025 par value)
(Title of class)
Indicate by check mark if the registrant is a well-known seasoned issuer,
as defined in Rule 405 of the Securities Act.
☐
Yes ☒No
Indicate by check mark if the registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Act.
☐
Yes ☒No
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
☒Yes☐ No
Indicate by check mark whether the registrant has submitted electronically
every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the
preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
☒Yes☐ No
Indicate by check mark whether the registrant is a large accelerated filer,
an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of "large
accelerated filer," "accelerated filer," "smaller reporting company" and "emerging growth company"
in Rule 12b-2 of the Exchange Act.
Large accelerated filer ☐ Accelerated filer ☐
Non-accelerated Filer ☒ Smaller reporting company ☒
Emerging growth company ☐
If an emerging growth company, indicate by check mark if the registrant
has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant
to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant
has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial
reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or
issued its audit report. ☐
Indicate by check mark whether the registrant is a shell company (as defined
in Rule 12b-2 of the Act). ☐ Yes ☒No
The aggregate market value of the voting and non-voting common equity held
by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such
common equity, as of the last business day of the registrant's most recently completed second fiscal quarter on November 30, 2021 is $38,294,000.
The number of shares outstanding of each
of the registrant's classes of common stock as of August 19, 2022: 3,502,292.
Current fiscal year end date:
--05-31
Entity current reporting status:
Yes
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TAYLOR DEVICES, INC.
DOCUMENTS INCORPORATED
BY REFERENCE
Documents Form 10-K Reference
Proxy Statement Part III, Items 10-14
FORM 10-K INDEX
PART I PAGE
Item 1. Business. 4
Item 1A. Risk Factors. 6
Item 1B. Unresolved Staff Comments. 6
Item 2. Properties. 6
Item 3. Legal Proceedings. 6
Item 4. Mine Safety Disclosures. 6
PART II
Item 6. Selected Financial Data. 8
Item 7A. Quantitative and Qualitative Disclosures About Market Risk. 17
Item 8. Financial Statements and Supplementary Data. 17
Item 9A. Controls and Procedures. 17
Item 9B. Other Information. 17
PART III
Item 10. Directors, Executive Officers and Corporate Governance. 17
Item 11. Executive Compensation. 17
Item 14. Principal Accounting Fees and Services. 17
PART IV
Item 15 Exhibits and Financial Statement Schedules 18
SIGNATURES 22
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PART I
Item 1. Business.
The Company was incorporated in the State of New York
on July 22, 1955 and is engaged in the design, development, manufacture and marketing of shock absorption, rate control, and energy storage
devices for use in various types of machinery, equipment and structures. In addition to manufacturing and selling existing product lines,
the Company continues to develop new and advanced technology products.
Principal Products
The Company manufactures and sells a group of very
similar products that have many different applications for customers. These similar products are included in one of eight categories;
namely, Seismic Dampers, Fluidicshoks®, Crane and Industrial Buffers, Self-Adjusting Shock Absorbers, Liquid Die Springs, Vibration
Dampers, Machined Springs and Custom Actuators. Custom derivations of all of these products are designed and manufactured for many aerospace
and defense applications. The following is a summary of the capabilities and applications for these products.
Seismic Dampers are designed to mitigate the effects
of earthquakes on structures and represent a substantial part of the business of the Company. Fluidicshoks® are small, extremely compact
shock absorbers with up to 19,200 inch-pound capacities, produced in 12 standard sizes for primary use in the defense, aerospace and commercial
industry. Crane and industrial buffers are larger versions of the Fluidicshoks® with up to 10,890,000 inch-pound capacities, produced
in more than 60 standard sizes for industrial applications on cranes and crane trolleys, truck docks, ladle and ingot cars, ore trolleys
and train car stops. Self-adjusting shock absorbers, which include versions of Fluidicshoks® and crane and industrial buffers, automatically
adjust to different impact conditions, and are designed for high cycle application primarily in heavy industry. Liquid die springs are
used as component parts of machinery and equipment used in the manufacture of tools and dies. Vibration dampers are used primarily by
the aerospace and defense industries to control the response of electronics and optical systems subjected to air, ship, or spacecraft
vibration. Machined springs are precisely controlled mechanical springs manufactured from a variety of materials. These are used primarily
for aerospace applications that require custom features that are not possible with conventional wound coil springs. Custom actuators are
typically of the gas-charged type, using high pressure, that have custom features not available from other suppliers. These actuators
are used for special aerospace and defense applications.
Distribution
The Company does not rely on sales representatives
in the United States but uses the services of several representatives throughout the rest of the world. Specialized technical sales
in custom marketing activities outside the U.S.A. are serviced by these sales representatives, under the direction and with the assistance
of the Company's President and in-house technical sales staff. Sales representatives typically have non-exclusive agreements with the
Company, which, in most instances, provide for payment of commissions on sales at 5% to 10% of the product's net aggregate selling price.
A limited number of distributors also have non-exclusive agreements with the Company to purchase the Company's products for resale purposes.
Competition
The Company faces competition on mature aerospace
and defense programs which may use more conventional products manufactured under less stringent government specifications. Two foreign
companies and two U.S. companies are the Company's main competitors in the production of crane buffers.
The Company competes directly against two other firms
supplying structural damping devices for use in the United States. For structural applications outside of the USA, the Company competes
directly with several other firms particularly in Japan, China and Taiwan. The Company competes with numerous other firms that supply
alternative seismic protection technologies.
Raw Materials and Supplies
The principal raw materials and supplies used by the
Company in the manufacture of its products are provided by numerous U.S. and foreign suppliers. The loss of any one of these would not
materially affect the Company's operations.
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Dependence Upon Major Customers
The Company is not dependent on any one or a few major
customers. Sales to four customers approximated 37% (15%, 8%, 8%, and 5%, respectively) of net sales for 2022. The loss of any or all
of these customers, unless the business is replaced by the Company, could result in an adverse effect on the results for the Company.
Patents, Trademarks and Licenses
The Company holds 6 patents expiring at different
times until the year 2035.
Terms of Sale
The Company does not carry significant inventory for
rapid delivery to customers, and goods are not normally sold with return rights such as are available for consignment sales. The Company
had no inventory out on consignment and no consignment sales for the years ended May 31, 2022 and 2021. No extended payment terms are
offered. During the year ended May 31, 2022, delivery time after receipt of orders averaged 8 to 10 weeks for the Company's standard products.
Due to the volatility of structural and aerospace/defense programs, progress payments are usually required for larger projects using custom
designed components of the Company.
Need for Government
Approval of Principal Products or Services
Contracts between the Company and the federal government
or its independent contractors are subject to termination at the election of the federal government. Contracts are generally entered into
on a fixed price basis. If the federal government should limit defense spending, these contracts could be reduced or terminated, which
management believes would have a materially adverse effect on the Company.
Research and Development
To accommodate growth and to maintain its presence
in current markets, the Company engages in product research and development activities in connection with the design of its products.
Occasionally, research and development for products in the aerospace and defense sectors is funded by customers or the federal government.
The Company also engages in research testing of its products. For the fiscal years ended May 31, 2022 and 2021, the Company expended
$1,213,000 and $924,000, respectively, on product research. This increase is primarily due to research and development that will
aid in accommodating planned growth in multiple sectors. For the years ended May 31, 2022 and 2021, defense sponsored research and
development totaled $334,000 and $243,000, respectively.
Government Regulation
Compliance with federal, state, and local laws and
regulations which have been enacted or adopted regulating the discharge of materials into the environment has had no material effect on
the Company, and the Company believes that it is in substantial compliance with such provisions.
The Company is subject to the Occupational Safety
and Health Act ("OSHA") and the rules and regulations promulgated thereunder, which establish strict standards for the protection
of employees, and impose fines for violations of such standards. The Company believes that it is in substantial compliance with OSHA provisions
and does not anticipate any material corrective expenditures in the near future. The Company currently incurs only moderate costs with
respect to disposal of hazardous waste and compliance with OSHA regulations.
The Company is also subject to regulations relating
to production of products for the federal government. These regulations allow for frequent governmental audits of the Company's operations
and fairly extensive testing of Company products. The Company believes that it is in substantial compliance with these regulations and
does not anticipate corrective expenditures in the future.
Employees
Exclusive of Company sales representatives and distributors,
as of May 31, 2022, the Company had 123 employees, including five executive officers. The Company has good relations with its employees.
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Item 1A. Risk Factors.
Smaller reporting companies are not required to provide the information
required by this item.
Item 1B. Unresolved Staff Comments.
Not applicable.
Item 2. Properties.
The Company's production facilities occupy approximately
six acres on Tonawanda Island in North Tonawanda, New York and are comprised of four interconnected buildings and two adjacent buildings.
The production facilities consist of a small parts plant (approximately 4,400 square feet), a large parts plant (approximately 13,500
square feet), and include a facility of approximately 7,000 square feet comprised of a test facility, storage area, pump area and the
Company's general offices. One adjacent building is a 27,000 square foot seismic assembly and test facility. This building contains overhead
traveling cranes to allow dampers to be built up to 45 ft. in length. It is also the site of two long bed damper test machines where seismic
dampers Taylor Devices manufactures will be tested at maximum force to satisfy customer specifications. Another adjacent building (approximately
2,000 square feet) is used as a training facility. These facilities total more than 54,000 square feet. Adjacent to these facilities,
the Company has a remote test facility used for shock testing. This state-of-the-art test facility is 1,200 square feet. The Company owns
two additional industrial buildings on nine acres of land in the City of North Tonawanda located 1.4 miles from the Company’s headquarters
on Tonawanda Island. Total area of the two buildings is 46,000 square feet. One building includes a machine shop containing custom-built
machinery for boring, deep-hole drilling and turning of parts. Another is used for painting and packaging parts and completed units.
The Company's real properties are subject to a negative
pledge agreement with its lender, M&T Bank. The Company has agreed with the lender that, for so long as the credit facilities with
the lender are outstanding, the Company will not sell, lease or mortgage any of its real properties. Additional information regarding
the Company's agreement with M&T Bank is contained in Item 7, Management's Discussion and Analysis of Financial Condition and Results
of Operations, at "Capital Resources, Line of Credit and Long-Term Debt."
The Company believes it carries adequate insurance
coverage on its facilities and their contents.
Item 3. Legal Proceedings.
There are no legal proceedings at present.
Item 4. Mine Safety Disclosures.
Not applicable.
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PART II
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters
and Issuer Purchases of Equity Securities.
Market Information
The Company's Common
Stock trades on the NASDAQ Capital Market of the National Association of Securities Dealers Automated Quotation ("NASDAQ") stock
market under the symbol TAYD. The high and low sales information noted below for the quarters of fiscal year 2022 and fiscal year 2021
were obtained from NASDAQ.
High Low High Low
Holders
As of May 31, 2022,
the number of issued and outstanding shares of Common Stock was 3,497,937 and the number of record holders of the Company's Common Stock
was 461. A substantial number of shares of the Company's Common Stock are held in street name. The Company believes that the total number
of beneficial owners of its Common Stock is less than 1,300.
Dividends
No cash or stock dividends have been declared during
the last two fiscal years. The Company plans to retain cash in the foreseeable future to fund working capital needs.
Rights Plan
As of September 25, 2018, the Company's Board of Directors
adopted a shareholder rights plan designed to deter coercive or unfair takeover tactics and prevent an acquirer from gaining control of
the Company without offering a fair price to shareholders. Under the plan, certain rights ("Rights") were distributed as a dividend
on each share of Common Stock (one Right for each share of Common Stock) held as of the close of business on October 2, 2018. Each whole
Right entitles the holder, under certain defined conditions, to buy one two-thousandths (1/2000) of a newly issued share of the Company's
Series A Junior Participating Preferred Stock ("Series A Preferred Stock") at a purchase price of $5.00 per unit of one two-thousandths
of a share. Rights attach to and trade with the shares of Common Stock, without being evidenced by a separate certificate. No separate
Rights certificates will be issued unless and until the Rights detach from Common Stock and become exercisable for shares of the Series
A Preferred Stock.
The Rights become exercisable to purchase shares of
Preferred Stock (or, in certain circumstances, Common Stock) only if (i) a person acquired 15% or more of the Company's Common Stock,
or (ii) a person commenced a tender or exchange offer for 10% or more of the Company's Common Stock, or (iii) the Board of Directors determined
that the beneficial owner of at least 10% of the Company's Common Stock intended to cause the Company to take certain actions adverse
to it and its shareholders or that such ownership would have a material adverse effect on the Company. The Rights Plan will expire on
October 5, 2028.
Issuer Purchases
of Equity Securities
A share repurchase agreement with a major broker-dealer,
under which the Company repurchased shares of its common stock on the open market, has been terminated by the Company. No shares have
been purchased since August 2011.
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Equity Compensation Plan Information
The following table sets forth information regarding
equity compensation plans of the Company as of May 31, 2022.
Equity Compensation Plan Information
Equity compensation plans approved by security holders:
Equity compensation plans not approved by security holders:
Item 6. Selected
Financial Data.
The Company qualifies
as a smaller reporting company, as defined by 17 CFR §229.10(f)(1) and is not required to provide the information required by this
Item.
Item 7. Management's Discussion and
Analysis of Financial Condition and Results of Operations.
Cautionary Statement
The Private Securities Litigation Reform Act of 1995
provides a "safe harbor" for forward-looking statements. Information in this Item 7, "Management's Discussion and Analysis
of Financial Condition and Results of Operations" and elsewhere in this 10-K that does not consist of historical facts are "forward-looking
statements." Statements accompanied or qualified by, or containing, words such as "may," "will," "should,"
"believes," "expects," "intends," "plans," "projects," "estimates," "predicts,"
"potential," "outlook," "forecast," "anticipates," "presume," "assume" and
"optimistic" constitute forward-looking statements and, as such, are not a guarantee of future performance. The statements involve
factors, risks and uncertainties, the impact or occurrence of which can cause actual results to differ materially from the expected results
described in such statements. Risks and uncertainties can include, among others, fluctuations in general business cycles and changing
economic conditions; variations in timing and amount of customer orders; changing product demand and industry capacity; increased competition
and pricing pressures; advances in technology that can reduce the demand for the Company's products, as well as other factors, many or
all of which may be beyond the Company's control. Consequently, investors should not place undue reliance on forward-looking statements
as predictive of future results. The Company disclaims any obligation to release publicly any updates or revisions to the forward-looking
statements herein to reflect any change in the Company's expectations with regard thereto, or any changes in events, conditions or circumstances
on which any such statement is based.
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Application of Critical Accounting Policies and
Estimates
The Company's consolidated financial statements and
accompanying notes are prepared in accordance with U.S. generally accepted accounting principles. The preparation of the Company's financial
statements requires management to make estimates, assumptions and judgments that affect the amounts reported. These estimates, assumptions
and judgments are affected by management's application of accounting policies, which are discussed in Note 1, "Summary of Significant
Accounting Policies", and elsewhere in the accompanying consolidated financial statements. As discussed below, our financial position
or results of operations may be materially affected when reported under different conditions or when using different assumptions in the
application of such policies. In the event estimates or assumptions prove to be different from actual amounts, adjustments are made in
subsequent periods to reflect more current information. Management believes the following critical accounting policies affect the more
significant judgments and estimates used in the preparation of the Company's financial statements.
Accounts Receivable
Our ability to collect outstanding receivables from
our customers is critical to our operating performance and cash flows. Accounts receivable are stated at an amount management expects
to collect from outstanding balances. Management provides for probable uncollectible accounts through a charge to earnings and a credit
to a valuation allowance based on its assessment of the current status of individual accounts after considering the age of each receivable
and communications with the customers involved. Balances that are collected, for which a credit to a valuation allowance had previously
been recorded, result in a current-period reversal of the earlier transaction charging earnings and crediting a valuation allowance. Balances
that are still outstanding after management has used reasonable collection efforts are written off through a charge to the valuation allowance
and a credit to accounts receivable in the current period. The actual amount of accounts written off over the five year period ended May
31, 2022 equaled less than 0.3% of sales for that period. The balance of the valuation allowance has increased to $16,000 at May 31, 2022
from $7,000 at May 31, 2021. Management does not expect the valuation allowance to materially change in the next twelve months for the
current accounts receivable balance.
Inventory
Inventory is stated at the lower of average cost or
net realizable value. Average cost approximates first-in, first-out cost.
Maintenance and other inventory represent stock that
is estimated to have a product life-cycle in excess of twelve-months. This stock represents certain items the Company is required to maintain
for service of products sold, and items that are generally subject to spontaneous ordering.
This inventory is particularly sensitive to technical
obsolescence in the near term due to its use in industries characterized by the continuous introduction of new product lines, rapid technological
advances, and product obsolescence. Therefore, management of the Company has recorded an allowance for potential inventory obsolescence.
Based on certain assumptions and judgments made from the information available at that time, we determine the amount in the inventory
allowance. If these estimates and related assumptions or the market changes, we may be required to record additional reserves. Historically,
actual results have not varied materially from the Company's estimates.
During fiscal 2021, the Company began a thorough review
of the facilities including the flow of inventory through the factory and warehouse areas to determine the most efficient utilization
of available space. This review continued through fiscal 2022. Inventory purchasing practices and stocking levels were also evaluated
and it was determined that a significant portion of the older items would be disposed of while the allowance for potential inventory obsolescence
would be increased as more items are identified for disposal. There was $772,000 and $1,101,000 of inventory disposed of during the years
ended May 31, 2022 and 2021. The provision for potential inventory obsolescence was zero and $1,500,000 for the years ended May 31, 2022
and 2021.
Revenue Recognition
Revenue is recognized when, or as, the Company
transfers control of promised products or services to a customer in an amount that reflects the consideration to which the Company expects
to be entitled in exchange for transferring those products or services.
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A performance obligation is a promise in a
contract to transfer a distinct good or service to the customer and is the unit of account. A contract’s transaction price is allocated
to each distinct performance obligation and recognized as revenue when, or as, the performance obligation is satisfied. The majority of
our contracts have a single performance obligation as the promise to transfer the individual goods or services is not separately identifiable
from other promises in the contracts which are, therefore, not distinct. Promised goods or services that are immaterial in the context
of the contract are not separately assessed as performance obligations.
For contracts with customers in which the Company
satisfies a promise to the customer to provide a product that has no alternative use to the Company and the Company has enforceable rights
to payment for progress completed to date inclusive of profit, the Company satisfies the performance obligation and recognizes revenue
over time (generally less than one year), using costs incurred to date relative to total estimated costs at completion to measure progress
toward satisfying our performance obligations. Incurred cost represents work performed, which corresponds with, and thereby best depicts,
the transfer of control to the customer. Contract costs include labor, material and overhead. Total estimated costs for each of the contracts
are estimated based on a combination of historical costs of manufacturing similar products and estimates or quotes from vendors for supplying
parts or services towards the completion of the manufacturing process. Adjustments to cost and profit estimates are made periodically
due to changes in job performance, job conditions and estimated profitability, including those arising from final contract settlements.
These changes may result in revisions to costs and income and are recognized in the period in which the revisions are determined. Any
losses expected to be incurred on contracts in progress are charged to operations in the period such losses are determined. If total costs
calculated upon completion of the manufacturing process in the current period for a contract are more than the estimated total costs at
completion used to calculate revenue in a prior period, then the profits in the current period will be lower than if the estimated costs
used in the prior period calculation were equal to the actual total costs upon completion. Historically, actual results have not varied
materially from the Company's estimates. Other sales to customers are recognized upon shipment to the customer based on contract prices
and terms. In the year ended May 31, 2022, 60% of revenue was recorded for contracts in which revenue was recognized over time while 40%
was recognized at a point in time. In the year ended May 31, 2021, 43% of revenue was recorded for contracts in which revenue was recognized
over time while 57% was recognized at a point in time.
For financial statement presentation purposes, the
Company nets progress billings against the total costs incurred and estimated earnings on uncompleted contracts. The asset, "costs
and estimated earnings in excess of billings," represents revenues recognized in excess of amounts billed. The liability, "billings
in excess of costs and estimated earnings," represents billings in excess of revenues recognized.
Income Taxes
The provision for income taxes provides for the tax
effects of transactions reported in the financial statements regardless of when such taxes are payable. Deferred tax assets and liabilities
are recognized for the expected future tax consequences of temporary differences between the tax and financial statement basis of assets
and liabilities. The deferred tax assets relate principally to asset valuation allowances such as inventory obsolescence reserves and
bad debt reserves and also to liabilities including warranty reserves, accrued vacation, accrued commissions and others. The deferred
tax liabilities relate primarily to differences between financial statement and tax depreciation. Deferred taxes are based on tax laws
currently enacted with tax rates expected to be in effect when the taxes are actually paid or recovered.
Realization of the deferred tax assets is dependent
on generating sufficient taxable income at the time temporary differences become deductible. The Company provides a valuation allowance
to the extent that deferred tax assets may not be realized. A valuation allowance has not been recorded against the deferred tax assets
since management believes it is more likely than not that the deferred tax assets are recoverable. The Company considers future taxable
income and potential tax planning strategies in assessing the need for a potential valuation allowance. In future years the Company will
need to generate approximately $4.2 million of taxable income in order to realize our deferred tax assets recorded as of May 31, 2022
of $876,000. This deferred tax asset balance is 7% ($61,000) more than at the end of the prior year. The amount of the deferred tax assets
considered realizable however, could be reduced in the near term if estimates of future taxable income are reduced. If actual results
differ from estimated results or if the Company adjusts these assumptions, the Company may need to adjust its deferred tax assets or liabilities,
which could impact its effective tax rate.
The Company's practice is to recognize interest related
to income tax matters in interest income / expense and to recognize penalties in selling, general and administrative expenses.
The Company and its subsidiary file consolidated Federal
and State income tax returns. As of May 31, 2022, the Company had State investment tax credit carryforwards of approximately $389,000
expiring through May 2027.
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Results of Operations
A summary of the period-to-period changes in the principal items included
in the consolidated statements of income is shown below:
Summary comparison of the years ended May 31, 2022 and 2021
Increase /
(Decrease)
Selling, general and administrative expenses $ 628,000
Income before provision for income taxes $ 1,875,000
Provision for income taxes $ 698,000
For the year ended May 31, 2022 (All figures
being discussed are for the year ended May 31, 2022 as compared to the year ended May 31, 2021.)
Year ended May 31 Change
... as a percentage of net revenues 28 % 14 %
The Company's consolidated results of operations showed
a 37% increase in net revenues and an increase in net income of 110%. Revenues recorded in the current period for long-term construction
projects (“Project(s)”) were 92% more than the level recorded in the prior year. We had 45 Projects in process during the
current period compared with 41 during the same period last year. Revenues recorded in the current period for other-than long-term construction
projects (non-projects) were 4% less than the level recorded in the prior year. The number of Projects in-process fluctuates from period
to period. The changes from the prior period to the current period are not necessarily representative of future results.
Sales of the Company's products are made to three
general groups of customers: industrial, structural and aerospace / defense. The Company saw a 60% increase from last year’s level
in sales to structural customers who were seeking seismic / wind protection for either construction of new buildings and bridges or retrofitting
existing buildings and bridges along with a 22% increase in sales to customers in aerospace / defense and a 1% decrease in sales to customers
using our products in industrial applications. The significant increase in sales to structural customers is primarily from domestic customers.
A breakdown of sales to these three general groups
of customers, as a percentage of total net revenue for fiscal years ended May 31, 2022 and 2021 is as follows:
Year ended May 31
Industrial 7 % 10 %
Aerospace / Defense 40 % 45 %
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Total sales within North America increased 52% from
last year. Total sales to Asia decreased 5% from the prior year. Net revenue by geographic region, as a percentage of total net revenue
for fiscal years ended May 31, 2022 and 2021 is as follows:
Year ended May 31
North America 78 % 70 %
The gross profit as a percentage of net revenue of
28% in the current period is double the 14% recorded in the same period of the prior year. The significant increase in gross profit as
a percentage of revenue is primarily due to the increase in domestic sales to structural customers. The prior year results were adversely
affected by the pandemic.
At May 31, 2021, we had 132 open sales orders in our
backlog with a total sales value of $22.0 million. At May 31, 2022, we had 135 open sales orders in our backlog with a total sales value
of $23.7 million. $7.6 million of the current backlog is on Projects already in progress. $9.3 million of the $22.0 million sales order
backlog at May 31, 2021 was in progress at that date. 41% of the sales value in the backlog is for aerospace / defense customers compared
to 43% at the end of fiscal 2021. As a percentage of the total sales order backlog, orders from structural customers accounted for 50%
at May 31, 2022 and 55% at May 31, 2021.
The Company's backlog,
revenues, commission expense, gross margins, gross profits, and net income fluctuate from period
to period. Total sales in the current period and the changes in the current period compared to the prior period, are not necessarily representative
of future results.
Selling, General and Administrative Expenses
Year ended May 31 Change
... as a percentage of net revenues 20 % 25 %
Selling, general and administrative expenses increased
11% from the prior year. Outside commission expense decreased 31% from last year's level due to the significant decrease in the level
of commissionable sales recorded in the current period as compared to the prior period. Other selling, general and administrative expenses
increased 18% from last year. The Company reduced its reliance on outside manufacturers’ representatives in FY22 and increased its
internal sales force in an effort to increase profitable sales. This is the primary reason that the level of commissionable sales has
decreased while the other SG&A expenses have increased.
The above factors resulted in operating income of
$2,473,000 for the year ended May 31, 2022, showing significant improvement from the $2,352,000 operating loss in the prior year.
Other income during the prior period includes $2,972,000
of financial assistance provided by the U.S. federal government as part of the Coronavirus Aid, Relief and Economic Security (CARES) Act
and the Consolidated Appropriations Act of 2021 (CAA): a.) $1,462,000 of income due to the forgiveness of the loan by the Small Business
Administration (SBA) under the Paycheck Protection Program (PPP), and b.) $1,510,000 of Employee Retention Credit (ERC) income. Other
income during the current period includes ERC income of $54,000.
The Company's effective tax rate (ETR) is calculated
based upon current assumptions relating to the year's operating results and various tax related items. The ETR for the fiscal year ended
May 31, 2022 is 12%, compared to the ETR for the prior year of -56%.
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A reconciliation of provision for income taxes at
the statutory rate to income tax provision at the Company's effective rate is as follows:
Computed tax provision at the expected statutory rate $ 538,000 $ 143,000
Tax effect of permanent differences:
Foreign-derived intangible income deduction (12,000 ) —
U.S. Government PPP loan forgiven — (307,000 )
The foreign-derived intangible income deduction is
a tax deduction provided to corporations that sell goods or services to foreign customers. It became available through Public Law 115-97,
known as the Tax Cuts and Jobs Act. The legislation that created the PPP and permitted the SBA to forgive loans made through the PPP also
directed that the forgiven loan would not be taxable income to the recipient.
Stock Options
The Company has stock option plans which provide for
the granting of nonqualified or incentive stock options to officers, key employees and non-employee directors. Options granted under the
plans are exercisable over a ten-year term. Options not exercised by the end of the term expire.
The Company measures compensation cost arising from
the grant of share-based payments to employees at fair value and recognizes such cost in income over the period during which the employee
is required to provide service in exchange for the award. The Company recognized $201,000 and $154,000 of compensation cost for the years
ended May 31, 2022 and 2021.
The fair value of each stock option grant has been
determined using the Black-Scholes model. The model considers assumptions related to exercise price, expected volatility, risk-free interest
rate, and the weighted average expected term of the stock option grants. The Company used a weighted average expected term. Expected volatility
assumptions used in the model were based on volatility of the Company's stock price for the thirty-month period immediately preceding
the granting of the options. The Company issued stock options in August 2021 and April 2022. The risk-free interest rate is derived from
the U.S. treasury yield.
The following assumptions were used in the Black-Scholes
model in estimating the fair market value of the Company's stock option grants:
Risk-free interest rate: 2.875 % 2.25 %
Expected life of the options: 4 years 4 years
Expected share price volatility: 32 % 29 %
Expected dividends: zero zero
The ultimate value of the options will depend on the
future price of the Company's common stock, which cannot be forecast with reasonable accuracy. A summary of changes in the stock options
outstanding during the year ended May 31, 2022 is presented below.
Weighted-
Number of Average
Options Exercise Price
Less: Options expired: 51,500 —
Closing value per share on NASDAQ at May 31, 2022: $ 9.30
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Capital Resources, Line of Credit and Long-Term Debt
The Company's primary liquidity is dependent upon
its working capital needs. These are primarily inventory, accounts receivable, costs and estimated earnings in excess of billings, accounts
payable, accrued commissions, billings in excess of costs and estimated earnings, and debt service. The Company's primary sources of liquidity
have been operations and bank financing.
Capital expenditures for the year ended May 31, 2022
were $1,392,000 compared to $1,622,000 in the prior year. Current year capital expenditures included new manufacturing machinery, testing
equipment, paint booths system, upgrades to technology equipment and assembly / test facility improvements. The Company has commitments
to make capital expenditures of approximately $1,600,000 as of May 31, 2022. These capital expenditures will be primarily for new manufacturing
and testing equipment.
The Company has a $10,000,000 demand line of credit
from a bank, with interest payable at the Company's option of 30, 60 or 90 day LIBOR rate plus 2.25%. There is no outstanding balance
at May 31, 2022 or May 31, 2021. The outstanding balance on the line of credit fluctuates as the Company's various long-term projects
progress. The line is secured by a negative pledge of the Company's real and personal property. This line of credit is subject to the
usual terms and conditions applied by the bank and is subject to renewal annually.
The bank is not committed to make loans under this
line of credit and no commitment fee is charged.
Inventory and Maintenance Inventory
Inventory turnover 3.1 2.1
Inventory, at $5,854,000 as of May 31, 2022, is only
slightly higher than at the prior year-end. Of this, approximately 88% is work in process, 4% is finished goods, and 8% is raw materials.
All of the current inventory is expected to be consumed or sold within twelve months. The level of inventory will fluctuate from time
to time due to the stage of completion of the non-project sales orders in progress at the time.
The Company continues to rework slow-moving inventory,
where applicable, to convert it to product to be used on customer orders. During fiscal 2021, the Company began a thorough review of the
inventory to identify and dispose of items that had not been used for several years and were unlikely to be used in the foreseeable future.
The Company disposed of approximately $772,000 and $1,101,000 of obsolete inventory during the years ended May 31, 2022 and 2021, respectively.
Accounts Receivable, Costs and Estimated Earnings in Excess of Billings
(“CIEB”) and Billings in Excess of Costs and Estimated Earnings (“BIEC”)
Number of an average day’s sales outstanding in accounts receivable (DSO) 42 42
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The Company combines the totals of accounts receivable,
the asset CIEB, and the liability BIEC, to determine how much cash the Company will eventually realize from revenue recorded to date.
As the accounts receivable figure rises in relation to the other two figures, the Company can anticipate increased cash receipts within
the ensuing 30-60 days.
Accounts receivable of $4,467,000 as of May 31, 2022
includes approximately $190,000 of amounts retained by customers on long-term construction projects. The Company expects to collect all
of these amounts, including the retained amounts, during the next twelve months. The number of an average day's sales outstanding in accounts
receivable (DSO) was 42 days at May 31, 2022 and May 31, 2021. The Company expects to collect the net accounts receivable balance, including
the retainage, during the next twelve months.
Other receivable is an amount of ERC claimed by the
Company for the second calendar quarter of 2021 and was received in the third calendar quarter of 2021.
The status of the projects in-progress at the end
of the current and prior fiscal years have changed in the factors affecting the year-end balances in the asset CIEB, and the liability
BIEC:
Number of projects in progress at year-end 19 14
Aggregate percent complete at year-end 47 % 32 %
Average total value of projects in progress at year-end $ 795,000 $ 963,000
Percentage of total value invoiced to customer 35 % 30 %
There are 5 more projects in-process at the end of
the current fiscal year as compared with the prior year end and the average value of those projects has decreased by 17% between those
two dates.
As noted above, CIEB represents revenues recognized
in excess of amounts billed. Whenever possible, the Company negotiates a provision in sales contracts to allow the Company to bill, and
collect from the customer, payments in advance of shipments. Unfortunately, provisions such as this are often not possible. The $3,336,000
balance in this account at May 31, 2022 is a 122% increase from the prior year-end. This increase reflects the higher aggregate level
of the percentage of completion of these Projects as of the current year end as compared with the Projects in process at the prior year
end. Generally, if progress billings are permitted under the terms of a project sales agreement, then the more complete the project is,
the more progress billings will be permitted. The Company expects to bill the entire amount during the next twelve months. 58% of the
CIEB balance as of the end of the last fiscal quarter, February 28, 2022, was billed to those customers in the current fiscal quarter
ended May 31, 2022. The remainder will be billed as the projects progress, in accordance with the terms specified in the various contracts.
The year-end balances in the CIEB account are comprised
of the following components:
Number of projects in progress 11 9
As noted above, BIEC represents billings to customers
in excess of revenues recognized. The $1,123,000 balance in this account at May 31, 2022 is in comparison to a $1,362,000 balance at the
end of the prior year. The balance in this account fluctuates in the same manner and for the same reasons as the account "costs and
estimated earnings in excess of billings," discussed above. Final delivery of product under these contracts is expected to occur
during the next twelve months.
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The year-end balances in this account are comprised
of the following components:
Number of projects in progress 8 5
Accounts payable, at $1,427,000 as of May 31, 2022,
is 20% less than the prior year-end. This decrease is normal fluctuation of this account and is not considered to be unusual. The Company
expects the current accounts payable amount to be paid during the next twelve months.
Commission expense on applicable sales orders is recognized
at the time revenue is recognized. The commission is paid following receipt of payment from the customers. Accrued commissions as of May
31, 2022 are $85,000. This is 68% less than the $269,000 accrued at the prior year-end. This decrease is generally due to the decrease
in the level of commissionable sales, discussed above. The Company expects the current accrued amount to be paid during the next twelve
months.
Other accrued expenses of $3,329,000 increased 94%
from the prior year level of $1,715,000. This increase is due to increases in customer prepayments on projects not yet started along with
an increase in accrued incentive compensation resulting from increased earnings and sales order bookings.
Management believes that the Company's cash on hand,
cash flows from operations, and borrowing capacity under the bank line of credit will be sufficient to fund ongoing operations and capital
improvements for the next twelve months.
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Item 7A. Quantitative and Qualitative Disclosures
About Market Risk.
Smaller reporting companies are not required to provide the information
required by this item.
Item 8. Financial Statements and Supplementary
Data.
The financial statements
and supplementary data required pursuant to this Item 8 are included in this Form 10-K as a separate section commencing on page 25 and
are incorporated herein by reference.
Item 9. Changes in and Disagreements With Accountants on Accounting
and Financial Disclosure.